Bank of New York Mellon may not be off the hook in Sentinel case

The Seventh Circuit Court of Appeals on Friday vacated an August ruling that allowed Bank of New York Mellon (BONY) to maintain priority over former customers of Sentinel Management Group to funds it to loaned Sentinel and potentially put BONY on the hook for $312 million in clawbacks from the 2007 Sentinel bankruptcy.

Sentinel had secured loans of up to $580 million from BONY using collateral that was transferred out of customer segregated accounts prior to the August 2007 bankruptcy. BONY was both a custodial bank for Sentinel as well as its creditor. After Sentinel filed for bankruptcy Sentinel bankruptcy trustee Fred Grede sued BONY in district court challenging the secured position of the loans it made to Sentinel and attempting to place customer claims in front of the BONY claims.

The Sentinel trustee lost that case but appealed in 2011 and this August a three-judge panel of the Seventh Circuit ruled to uphold the lower court’s ruling. Shortly thereafter Grede filed a petition asking the entire Seventh Circuit to examine the case.

The brief Nov. 30 ruling stated, “The opinion of this court issued on August 9, 2012, is WITHDRAWN and the judgment is VACATED. This appeal remains under consideration by the panel.”

Grede says, “We are back to where we were a year ago.”

The Sentinel bankruptcy case is more than five years old and the trustee has managed to return approximately 35% of funds to all customers. In addition to the case with BONY, Grede is awaiting a judgment in another case where he is seeking to clawback funds from former Sentinel customers who received a 70% allocation just prior to the bankruptcy filing. Grede had also reached a settlement with Citadel, which purchased securities from Sentinel at a signifcant discount just prior to the bankruptcy filing.

Grede had argued that the Commodity Exchange Act applies to BONY and that their claims to funds should not have been put in front of those of customers.

The court ruled against the trustee’s claims of fraudulent transfer and equitable subordination of the bank’s claim.

In its August ruling the three-judge panel noted, “Perhaps the bank should have known that Sentinel violated segregation requirements, but as the district court found, ‘such a lack of care does not rise to the level of the egregious misconduct necessary for equitable subordination.’”

Now the entire Seventh Circuit can look at it again.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange. Dan joined Futures magazine in 2001, before the name change to Modern Trader, and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.